The three actions for which Richard Nixon will always be remembered: Watergate, opening China, and creating the Petrodollar with Saudi Arabia in 1973. One of those moves was dumb as dirt, one seemed smart but may cause serious problems for us in the future, and one was downright brilliant — but may be undone by one of Nixon’s other decisions.
Sadly, few seems to be paying much attention to the two critical issues still in play over 40 years after Nixon put them in motion. Instead, we’re enjoying a period of collective hysteria over issues that, in the scheme of things, don’t really amount to a hill of beans. At least this time, we’re not alone in focusing on doing foolish things under the banner of “our country first.”
After all, Donald Trump ran on a strong campaign of, apparently, “every trade deal we’ve ever done was the worst trade deal anyone could imagine.” That raises the question of how our nation’s Gross Domestic Product has gone from $9.2 trillion the year we signed the NAFTA agreement to $16.7 trillion today. (Nominal GDP in the same period went from $6.5 trillion to $18.6 trillion.)
But, again, it’s not just us. England voted to leave the European Union, apparently because actor Michael Caine said he’d rather be a poor master than a rich servant — and that illogical statement caught on with the public. Both our renegotiating NAFTA and England’s desire to leave the EU has thrown the international auto industry into some chaos and concern over its future.
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Our demands for NAFTA are that regional content, or parts, used in vehicles produced in the three NAFTA countries should be increased to 85 percent, while content in these vehicles from just the United States needs to be 50 percent of the total. Both are a substantial increase from what is currently required. Then there’s the sunset provision: All of this goes away in five years unless all three countries agree to a continuance.
As pointed out in this column a few weeks ago, it’s not just supply lines and the cost of materials to build vehicles, regardless where the factories are located, that are in place; contracts also exist with suppliers covering the parts needed for production. And you can’t just tear up everyone’s contracts because a trade agreement demands that you buy certain parts elsewhere. Sure, in time everything can be rearranged, but what’s the real benefit here? Turmoil today and the promise of a slight increase in employment at U.S. parts facilities if we get our way?
Likewise, the automakers are jumping all over the British government because the vast majority of vehicles they build in England are exported primarily to EU countries, as well as worldwide. So, if there’s no deal on the UK leaving the EU then, without a new series of trade agreements, tariffs for parts and cars are put back into place. It’s estimated that they could add 10 percent to the price of finished vehicles. At least, according to Peter Wells at the Cardiff Business School, quoted in the New York Times.
That added tariff would make it more logical to build most vehicles — not to mention buy parts for automobile production — in EU countries instead of England. It’s actually no more complex than that. But British pride is on the line here; and, as the proverb has it, “Pride goeth before destruction, and an haughty attitude before a fall.”
Additionally, after years of negotiations we walked away from the Trans Pacific Partnership agreement simply because it too was called one of the worst trade agreements in history; in fact, it tied our economy and trade to most of the Pacific Rim’s — except China’s. At this point we need to clarify what’s really happening today: America is moving away from seven decades of neocolonialism, or using capitalism and cultural influence combined with globalization to bring other countries into our economic sphere of influence.
This was preferred to the 19th century concept of straight-up imperialism, in which military forces conquer a country and an imperial authority keeps those countries under control. Think India under British rule, or the Middle East for that matter, and the Philippines and Cuba under Spanish rule. However, FDR saw that the days of imperialism were over for trade in the modern world, so he brought the Middle East under American influence with simple trade agreements rather than by force.
Petroyuan vs. Petrodollar: www.star-telegram.com/cars/ed-wallace
Fortunately for us, after the Second World War our industries were untouched by the conflict and as a result there was an unnatural demand for American know-how, goods, and capital to rebuild other nations. In time that made them our competitors, but it ended World Wars as a way to solve international problems.
As for the Middle East, in 1973 Richard Nixon, having already taken America off the gold standard, negotiated a deal with Saudi Arabia to use the American dollar as the sole instrument for buying and selling oil. After all, tying our currency to that critical commodity lends our dollar strength worldwide that Nixon feared was lost by moving off the gold standard.
Nixon also opened up China in 1971, the same year he took us off the gold standard, and that too has created one of the world’s great competitors for American supremacy worldwide. Let’s face it, while the Cold War was problematical for many who wanted security over all else, it was also an international battle to see which countries would align under the American sphere of influence and which under Russia’s. That’s why Nixon’s move on China was so brilliant. He saw an opening and put a wedge in it, between China’s alignment with Russia and the rest of the world.
But now it’s 46 years later, and already the first Chinese-built automobiles are here in America creating new competition for our own automobile manufacturers — and those from Europe, South Korea and Japan. Moreover, Chinese cars are being exported to other countries, where they will directly compete with vehicles built by U.S. automakers and those of our allies. Meanwhile, we walked on the Trans Pacific Partnership, may or may not get a new NAFTA deal approved, decertified the Iran Nuclear Agreement, and are watching our close friends the Brits do similarly silly things in their part of the world. And all the while China is on the move in a serious way.
We talk about investing $1 trillion in new infrastructure in America, but the Chinese are already spending that kind of money outside China, on its new Silk Road initiative. In fact, earlier this year a freight train arrived at the depot in Barking, east London, having traveled 7,500 miles directly across eight countries carrying goods made in China. But that was just a continuation of the progress made and paid for by China for worldwide infrastructure. Last year over 1,700 freight trains arrived in Europe non-stop from China — and that was double the number from the previous year.
Even as this is written, China is turning the former fishing village of Gwadar, Pakistan, into one of the world’s largest transit and transshipment facilities, designed to handle Chinese exports. Last year China made an initial commitment to Africa of $60 billion. This had real logic to it, too: Already China is Africa’s largest trading partner, having surpassed the U. S. in 2009.
Meanwhile, we’re looking at our Great Wall prototypes for a future barrier between the United States and Mexico as a smart way to spend our billions. With more than 10 million Mexicans already in the U.S., one might think this solution is kind of late — but it does highlight the obvious: While we are trying to build walls, our newest and toughest competitor in the world is tearing them down.
Further, China has its eyes set on another prize: It’s the upcoming IPO for Saudi Aramco, which is estimated to be worth $2 trillion for Saudi Arabia if fully subscribed. And it turns out China has made two suggestions. First, it’s willing to take 5 percent of the open shares in Saudi Aramco when it goes public; and when one is talking about $2 trillion, 5 percent is a huge commitment. But it’s also rumored that the Chinese government would like the Saudis to consider trading their oil worldwide in China’s currency, the yuan. That would end the days of the U.S. Petrodollar by giving China’s currency the same status as ours — assuming it doesn’t supplant it.
What hath Nixon wrought?
China is an economic powerhouse, and so is the United States, no matter how much we’ve been led to believe we aren’t. But today China wants to dominate manufacturing, where once we were the world’s best. Moreover, China’s position is that its auto industry would be one of the key instruments of its worldwide conquest of commercial purchases. Cars, trucks, and SUVs are like that, both because they use lots of parts from many other industries, and because of the large sums of money each sale brings in foreign trade.
Now China is looking to supplant us in Saudi Arabia by becoming the largest outside shareholder in the Saudis’ oil industry, while apparently wanting to make China’s the currency for international trading in oil. As one analyst put it at Foreign Policy, if the Saudis allow the yuan as a trade currency, the other OPEC nations will certainly follow. The irony is that Richard Nixon put both countries’ issues into play. He brought China out into the world and secured our currency by moving all oil trades with it.
So if England has to do a hard Brexit, meaning they can’t get new no-tariff trade agreements, then it will lose part of its auto industry. Of course, China has the ability to ship its cars on freight trains directly from Chinese factories into London today — but that’s not much consolation.
On the other hand, when the Iran Nuclear Agreement was signed and sanctions dropped, Renault was one of the first automakers to say it would restart production and sales in that country. Since we’ve decertified that agreement, European nations that are signatories to it have said their investment in Iran will continue, no matter what we finally do.
There’s two lines of thought here. The last time we did something like this was back in 1995 with Bill Clinton. We forced the Japanese to buy American cars and our parts, and in the end the price of Japanese cars built in Japan and shipped here jumped, in some cases by 25 percent. So who won that mini-trade war? American pride said we beat them to a pulp in those negotiations. America’s reality is that the price we paid for their cars became almost unbearable for some. But that’s what always happens when trade negotiations become moored in pride.
There’s an old saying that when goods don’t cross borders, soldiers will. But the entire world’s trading platform is pivoting right now, potentially altering the future of automobiles, and oil to run them.
And all we care about is building a wall.
© Ed Wallace 2017; Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: firstname.lastname@example.org